I’m an authorized user on Mom’s credit card. What happens if she declares bankruptcy?

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Dear Credible Money Coach,

My mom is experiencing health issues, resulting in her inability to go back to work. She currently receives Social Security but not enough to cover her living accommodations and credit card debt. We are looking at exploring possible options, but I have a question. Currently, I am an authorized user on one of her credit cards. If she files bankruptcy, am I responsible for the balance owed and does that affect my credit? — Kristal

Hello Kristal, and thanks for your question. I’m sorry to hear about your mother’s situation, and I hope for a full recovery for her.

Filing for bankruptcy is a serious financial step that can negatively affect her credit for many years. But there is a bit of good news — if your mom must take this last-resort step, her credit card debt won’t become your problem.

And, since you mention that you’re looking into other options, you might consider using a personal loan to pay off high-interest credit card debt. A personal loan isn’t right for everyone, but if your mother can qualify for one at a good rate, it may help her to manage the debt and avoid the credit impact of bankruptcy. 

You can compare personal loan rates from multiple lenders with Credible, and it won’t affect your credit score.

What it means to be an authorized user

A credit card holder can add another person to their account in a couple ways. One is to take out a joint credit card with another person. 

With a joint credit card, both people on the account share benefits and responsibilities. Both parties can use the card to make charges, and both are responsible for paying the bill — regardless of who actually did the spending. They’ll also share the credit impact of the card, whether it’s good because they pay the bill on time or bad if they miss or skip payments.

Another option is to add someone as an authorized user to an existing account, which is what you say your mother did. By adding you as an authorized user, she basically told the credit card issuer that you’re allowed to make charges to her account. 

But she remained the sole owner of the account — and as such is solely responsible for making payments on the balance. That means she was responsible for paying the bill every month, even if you were the only one who made any charges on the account. 

That said, it’s usually a good idea (and only fair) for an authorized user to cover the charges they made. 

How being an authorized user can affect your credit

One of the main reasons parents add children to their accounts as authorized users is to help the child build positive credit history

If a card owner pays the credit card bill on time every month, and the card issuer reports authorized user information to the credit bureaus, the positive habits of the cardholder can help boost the credit standing of the authorized user. 

Conversely, if the card owner misses payments or has a high credit utilization ratio (how much credit they use versus how much they have available), the authorized user’s credit could be negatively affected. A lot will depend on how the credit bureau treats authorized users and the card owner’s credit history.

Bankruptcy and being an authorized user

The simple answer to your question, Kristal, is probably not — if your mother declares bankruptcy, you’re not responsible for paying any remaining balance on the credit card for which you’re an authorized user. That’s no guarantee that the card issuer won’t try to convince you to pay, though: Debt collectors may be aggressive. But you won’t be legally obligated to pay.

What’s more, you’re not obligated regardless of what type of bankruptcy your mother declares. 

Chapter 7 bankruptcy requires the filer to liquidate assets to help pay as much of their debt as possible, then wipes away the remaining debt. With Chapter 7, your mother would no longer be responsible for her credit card debt. If she files for Chapter 13 bankruptcy, the courts will set your mother up with a repayment plan to pay off some, most, or even all of her debt over time.

That said, it’s important to note that your mother not paying that card as agreed (which will happen if she declares bankruptcy) could affect your credit as an authorized user. I suggest having her remove you from the card as an authorized user before she stops paying on the card or files for bankruptcy.

Alternatives to consider

Bankruptcies stay on credit reports for years and can make it difficult to qualify for credit in the future, or to qualify at favorable rates and terms. Filing for bankruptcy should always be a last resort.

If at all possible, your mother should try to convert her high-interest credit card debt into something more manageable with a lower interest rate and/or monthly payment. Personal loans, home equity loans, and cash-out refinances are all lower-interest credit products that can be used to pay off credit card debts. Of course, these products aren’t right for everyone in every situation.

Another option is to consult with a debt counselor who can help your mother work with her creditors and set up a livable repayment plan. While this can affect her credit, the negative impact will be far less than a bankruptcy would create.

If she decides to consider a personal loan, it’s important that your mom comparison shops to find the best rate available to her. Credible makes it easy to compare rates from multiple lenders without affecting your credit score.

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About the author: Dan Roccato is a clinical professor of finance at University of San Diego School of Business, Credible Money Coach personal finance expert, a published author, and entrepreneur. He held leadership roles with Merrill Lynch and Morgan Stanley. He’s a noted expert in personal finance, global securities services and corporate stock options. You can find him on LinkedIn.